BACKGROUNDER No

BACKGROUNDER No. 3363 | November 15, 2018 Revised and Updated November 29, 2018 A State-by-State Comparison of 529 College Savings Plans Jonathan Butcher and Elizabeth Slattery

Abstract As part of the Tax Cuts and Jobs Act enacted last year, federal lawmak- Key Points ers gave parents more flexibility with their own savings for their children’s education. Now, families that save money for college using what nn Individuals and families should are commonly known as 529 college savings plans (named after Sec- have the ability to make decisions tion 529 of the Internal Revenue Code) can apply some of those savings about how to save and spend their hard-earned money. Inves- to pay tuition at private K–12 schools before a student finishes high tors must choose what is best for school. Because state policies and investment options are central com- their current and future needs. ponents of 529 plans, policymakers should review state laws to make nn sure state rules do not interfere with the new options for students in With the Tax Cuts and Jobs Act, Washington gave families and federal tax law. Whether families and investors should use 529 savings students more options to utilize plans to pay for K–12 expenses is a decision for parents and students. their own savings. State policymakers should not interfere with parents who choose to nn Families that save money for col- use their 529 savings plans to pay for K–12 education expenses. lege using 529 college savings plans can now use some of that Introduction savings to pay tuition at private As part of the Tax Cuts and Jobs Act (TCJA) enacted last year, K–12 schools—before a student federal lawmakers gave parents more flexibility with their own sav- finishes high school. 1 ings for their children’s education. Now, families that save money for nn State policymakers should not college using what are commonly known as 529 college savings plans interfere with parents who (named after Section 529 of the Internal Revenue Code) can apply choose to use their 529 savings some of those savings to pay tuition at private K–12 schools before a plans to pay for K–12 educa- student finishes high school.2 tion expenses. While the tax incentives for college savings with a 529 plan are nn State lawmakers should revise part of federal law, nearly every state offers at least one 529 invest- statutes to make clear that 529 ment savings plan and a prepaid college tuition plan. Generally, state accounts may be used for any treasurers operate the savings options in conjunction with private expenses authorized by any section of 529. State statutes should investment services. Families and students can save money in any be written to automatically align with any future changes to this This paper, in its entirety, can be found at http://report.heritage.org/bg3363 section of federal code. The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002 (202) 546-4400 | heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress. BACKGROUNDER | NO. 3363 November 15, 2018

state’s 529 savings plan and use the money to attend $10,000 per year per child made to pay for K–12 pri- college anywhere in the country (although for 529 vate school tuition.6 Families can now save money in prepaid tuition plans, the savings must be used at 529 plans and use the funds, without tax penalty, for the pre-selected college). The changes in the TCJA only apply to 529 investment plans. For example, nn College tuition; Nevada has several 529 savings plans with investment options from Vanguard to USAA.3 As a separate nn College room and board; option, Nevada allows families to prepay tuition at in-state colleges at today’s tuition rates. nn College activity fees that must be paid as a condi- With 529 savings plans—as opposed to prepaid tion of enrollment; tuition plans—parents and students have several options for saving and then using money for college. nn College books, supplies, and “equipment needed Families can choose any state’s 529 savings plan, for a course of study”; regardless of where they live. Parents and families choose a plan, deposit money, and select an invest- nn Computer hardware and any costs related to Inter- ment option, much like the process for saving for net access for college classes; and retirement in an Individual Retirement Account or 401(k). With a 529 savings plan, the earnings are nn Tuition at private K–12 schools, up to $10,000 per not subject to federal taxes if the money is used for year.7 eligible post-secondary—and now K–12—expenses.4 From the perspective of federal taxes, families real- Use of 529 plans has grown remarkably since fed- ize tax savings after they withdraw money from the eral lawmakers created the option in 1996. Accord- accounts. Some states allow taxpayers to deduct 529 ing to the Investment Company Institute, families plan contributions from their income when they file have opened some 12 million 529 accounts around their taxes, usually if a state resident chooses to invest the country—with total assets topping $293 billion.8 in his or her state’s 529 savings plan. In this way, fami- The number of accounts has doubled since 2005, and lies saving with a 529 plan in a state that offers a tax a Wall Street Journal headline says the “plans are even deduction can realize tax savings before they make hotter after [the] tax overhaul.”9 withdrawals—while they are still putting money away Because state policies and investment options are for the future.5 central components of 529 plans, in many states, poli- The federal tax law changed 529 plans by expand- cymakers are reviewing state laws to evaluate wheth- ing the tax benefits to include withdrawals of up to er they interfere with the new options for students

1. Lindsey M. Burke and Jonathan Butcher, “Improved and Expanded 529 College Savings Plans Create More Opportunities for Families,” Heritage Foundation Backgrounder No. 3274, December 27, 2017, https://www.heritage.org/sites/default/files/2017-12/BG3274.pdf. 2. Tax Cuts and Jobs Act of 2017, Public Law 115–97. 3. Nevada State Treasurer, “Nevada College Savings Plans,” http://www.nevadatreasurer.gov/CollegeSavings/CSP_Home/ (accessed November 3, 2018). 4. Internal Revenue Service, “529 Plans: Questions and Answers,” https://www.irs.gov/newsroom/529-plans-questions-and-answers (accessed November 3, 2018). 5. While this is reasonable state policy, it would be bad federal policy because it would subsidize college savings—an improper role for Washington. 6. 26 U.S. Code § 529(c)(7). 7. U.S. Department of the Treasury, Internal Revenue Service, “529 Plans: Questions and Answers,” https://www.irs.gov/newsroom/529-plans- questions-and-answers (accessed November 3, 2018), and U.S. Department of the Treasury, Internal Revenue Service, “Publication 970: Tax Benefits for Education,” https://www.irs.gov/pub/irs-pdf/p970.pdf (accessed November 3, 2018). 8. Investment Company Institute, “529 Plan Data: December 2017,” May 2, 2018, https://www.ici.org/research/stats/529s/529s_17_q4 (accessed November 3, 2018). 9. Laura Saunders, “529 College-Savings Plans Are Even Hotter After Tax Overhaul,” The Wall Street Journal, January 5, 2018, https://www.wsj. com/articles/education-savings-plans-are-even-hotter-aftertax-overhaul-1515160800 (accessed November 3, 2018).

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CHART 1 529 College Savings Plans

NUMBER OF 529 COLLEGE SAVINGS PLANS, TOTAL 529 COLLEGE SAVINGS PLAN ASSETS, IN MILLIONS IN BILLIONS OF U.S. DOLLARS $293.9

12.2

2.9

$18.5

SOURCE: Investment Company Institute, “529 Plan Data: December 2017,” May 2, 2018, https://www.ici.org/research/stats/529s/529s_17_q4 (accessed October 16, 2018). BG3363 heritage.org

under federal tax law. In 2018, it is common to find a However, in New York, eligible 529 expenses are message on state 529 plan websites that says federal defined as “any qualified higher education expense “legislation includes several new provisions related included in section 529 of the Internal Revenue Code specifically to 529 plan accounts,” and the website of 1986, as amended.”12 Because the definition speci- will “provide more information as additional details fies that the withdrawal must be for a higher education about the effects of the tax bill become clear.”10 expense, this language appears to prevent account Specifically, state policymakers are reviewing state holders from using account funds for K–12 expenses. definitions for eligible 529 expenses to determine if the Under current law, New York could levy a financial addition of K–12 private school tuition in federal law penalty or tax the money after it is withdrawn. conflicts with state law. For example, in Rhode Island, Some states, then, will need to revise their laws in the state law governing 529 accounts says a quali- order to provide parents and students with the option fied higher education expense includes “tuition, fees, to use their own savings to realize the full benefits of books, supplies and equipment required for enroll- 529 savings plans under federal law. ment or attendance at an institution of higher educa- A few states have done so already. In Louisi- tion, and other education costs defined by federal law.”11 ana, lawmakers created a new 529 savings program This language appears to allow 529 account holders called START K12, which “allows families to save for in Rhode Island to use their savings for K–12 private tuition expenses related to attendance at any Loui- school tuition without a state tax penalty. siana school that provides any or all of kindergarten

10. See, for example, Arkansas 529 College Investing Plan, https://www.arkansas529.org/home.html (accessed November 3, 2018); Colorado’s CollegeInvest, https://www.collegeinvest.org/ (accessed November 3, 2018); and news release, “Important News: Federal Legislation Signed by President Trump Includes Changes to Section 529 College Savings Plans,” Connecticut Higher Education Trust, January 9, 2018, https:// www.aboutchet.com/buzz/?id=983 (accessed November 3, 2018). 11. 16 R.I. Gen. Laws § 61-57-3, http://webserver.rilin.state.ri.us/Statutes/TITLE16/16-57/16-57-3.HTM (accessed November 3, 2018). 12. NY Educ L § 695-B (2017).

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MAP 1 529 Accounts for K–12 by, State Can families in your state use funds from 529 accounts for K-12 expenses without paying a penalty under state law? ■ Yes ■ No ■ Maybe

WA VT NH ME MT ND OR MN ID SD WI NY MA RI WY MI CT PA NE IA NJ NV OH UT IL IN DE WV MD CA CO VA KS MO DC KY NC TN AZ OK NM AR SC AL MS GA TX LA AK FL

NOTE: Wyoming does not currently have a 529 plan. SOURCE: Heritage Foundation research. BG3363 heritage.org

through twelfth grade.”13 Other states are considering How to Revise State Law to Align with legislation to revise state law.14 Current and Future Federal Changes to As state lawmakers prepare for the 2019 legislative 529 Savings Plans session and taxpayers consider their options before With the new federal tax relief for 529 accounts, the end of this tax year, this paper provides a list of many families are wondering if their state will extend which states do and do not need to revise their laws in tax relief under their laws for K–12 private school order to allow families and students to take advantage tuition expenses. The 2017 law amended 26 U.S.C. of the new options afforded to them in 529 savings § 529(c), adding “expenses for tuition in connection plans. This paper will also explain the key features of with enrollment or attendance at an elementary or what needs to change or be added to state law in order secondary public, private, or religious school” to the to allow for the purchase of K–12 tuition. definition of “qualified higher education expense.”15

13. Louisiana Office of Student Financial Assistance, “START K12,” http://www.startsaving.la.gov/savings/index.jsp (accessed November 3, 2018). 14. Megan Gorman, “Why You Shouldn’t Care If Your State Doesn’t Comply with the New 529 Rules,” Forbes, May 25, 2018, https://www.forbes. com/sites/megangorman/2018/05/25/why-you-shouldnt-care-if-your-state-doesnt-comply-with-the-new-529-rules/#2bca84eb1c71 (accessed November 3, 2018). 15. 26 U.S. Code § 529 (c)(7).

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This subsection of the statute deals with tax treat- indicates that funds may only be used at an “eligible ment of 529 accounts for designated beneficiaries and educational institution” and the definition under contributors under federal law, and the amended lan- section 529 does not include K–12 schools.17 guage makes clear that it only changes subsection (c) of the federal statute. The general definitions section nn Alaska. Yes. Alaska does not have personal income of the statute, § 529(e), defines “qualified higher edu- tax, so there would not be a state tax penalty. cation expenses” and does not include K–12 private or religious schools. nn Arizona. No. Arizona law states that qualified Many states point to § 529(e) in their laws, and higher education expenses must meet “the defi- some of these states have extended the federal tax nition of qualified higher education expenses in break through guidance issued by the state’s treasur- section 529 of the internal revenue code.”18 er or 529 plan. Other states generally reference any qualified expenses found in § 529, and some states nn Arkansas. Yes. Arkansas amended its law this year, are interpreting this section to extend the federal defining qualified higher education expenses as tax break under their laws. State lawmakers should “tuition and other permitted expenses as set forth revise statutes to make clear that 529 accounts may in 26 U.S.C. § 529, as in effect on January 1, 2018.”19 be used for any expenses authorized by any section of 529. States should not rely on guidance from the nn California. No. California law states that quali- state’s treasurer or 529 plan that conflicts with the fied higher education expenses are “expenses of plain text of their statutes and instead should amend attendance at an institution of higher education as those statutes to automatically align with any future provided in paragraph (3) of subsection (e) of Sec- changes to this section of federal code. tion 529 of the Internal Revenue Code of 1986, as Below is a look at the status of 529 accounts in it is amended from time to time, if, as determined every state. by the board, the amendment is consistent with the purposes of this article.”20 Can Families in Your State Use Funds from 529 Accounts for K–12 Expenses nn Colorado. No, although Colorado has indicated Without Incurring Penalties Under this is under legal review. Colorado law states that State Law?16 qualified higher education expenses “has the same meaning as that term is defined in section 529 of nn Alabama. No. In January 2018, H.B. 251 was intro- the internal revenue code.”21 duced in the Alabama House of Representatives and would have aligned with the amended federal lan- nn Connecticut. Maybe. Connecticut law states guage. By the time H.B. 251 passed in March, that that qualified higher education expenses include language had been stripped from the bill. The Ala- “tuition, fees, books, supplies and equipment bama Department of Revenue advises that “quali- required for the enrollment or attendance of a fied higher education expenses” are those defined in designated beneficiary at an eligible educational section 529, while the Office of the State Treasurer institution, including undergraduate and graduate

16. This paper is for informational purposes only and is not intended to serve as tax or legal advice. You should consult a tax or legal advisor to determine the impact of the federal and state laws on your particular situation. 17. See Alabama Department of Revenue, “Alabama 529 Savings Plan FAQ,” https://revenue.alabama.gov/individual-corporate/alabama-529- savings-plan-faq/ (accessed November 3, 2018), and Office of Alabama State Treasurer, “CollegeCounts 529,” http://treasury.alabama.gov/ collegecounts/ (accessed November 3, 2018). 18. Ariz. Rev. Stat. § 15-871. 19. Ark. Code § 6-84-103(14) (2018). 20. Cal. Com. Code § 69980, http://leginfo.legislature.ca.gov/faces/codes_displayText. xhtml?lawCode=EDC&division=5.&title=3.&part=42.&chapter=2.&article=19 (accessed November 3, 2018). 21. Colo. Rev. Stat. § 23-3.1-302, https://codes.findlaw.com/co/title-23-postsecondary-education/co-rev-st-sect-23-3-1-302.html (accessed November 3, 2018).

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schools and any other higher education expenses nn Illinois. No. Illinois law defines “qualified expens- that may be permitted by Section 529.”22 es” as “tuition, fees, and the costs of books, supplies, and equipment required for enrollment or nn Delaware. No. Delaware law states that qualified attendance at an eligible educational institution.” higher education expenses include “tuition and “Eligible educational institutions” include pub- other permitted expenses as presently set forth lic and private colleges, junior colleges, graduate in 26 U.S.C. § 529(e) or as hereafter permitted by schools, and certain vocational institutions.28 such successor or amended section for the enrollment or attendance of a designated beneficiary at nn Indiana. Yes. In May 2018, the state amended its a higher education institution.”23 law to include “tuition in connection with enrollment or attendance at an elementary or second- nn Florida. Yes. Florida does not have personal ary public, private, or religious school located in income tax. Florida law states that qualified high- Indiana and…permitted under Section 529 of the er education expenses are set by the Florida Pre- Internal Revenue Code.”29 paid College Board, consistent with the Internal Revenue Code.24 nn Iowa. Yes. In May 2018, the Iowa legislature amended its definition of “qualified education nn Georgia. Yes. On April 3, 2018, the Georgia Path- expenses” to include “elementary and secondary 2College 529 Plan announced distributions made school expenses for tuition described in section for K–12 tuition at public, private, or religious 529(c)(7) of the Internal Revenue Code.”30 schools are income tax free “up to a maximum of $10,000 of distributions” per taxable year.25 nn Kansas. Maybe. Kansas law states that qualified higher education expenses are any expenses nn Hawaii. Maybe. Hawaii law states that qualified included in section 529 of the Internal Revenue higher education expenses include “any qualified Code.31 higher education expense defined in section 529 of the Internal Revenue Code.”26 nn Kentucky. Yes. In July, the state amended its definition of qualified educational expenses to include nn Idaho. Yes. In March 2018, the state amended its “tuition of up to…$10,000 per year in connection law to align with the federal change, stating that with enrollment or attendance at an elementary qualified higher education expenses “shall have or secondary public, private, or religious school.”32 the meaning provided in 26 U.S.C. section 529.”27 The state has instructed the company that manag- es 529 plans for Kentucky and several other states

22. Rute Pinho, “Federal Changes to 529 Plans,” Connecticut Legislature Office of Legislative Research, January 23, 2018, https://www.cga. ct.gov/2018/rpt/pdf/2018-R-0036.pdf (accessed November 3, 2018). 23. Del. Code Ann. tit. § 3485, http://delcode.delaware.gov/title14/c034/sc12/index.shtml (accessed November 3, 2018). 24. Fla. Stat. § 1009.981, http://www.leg.state.fl.us/statutes/index.cfm?mode=View%20Statutes&SubMenu=1&App_mode=Display_ Statute&Search_String=florida+529+savings+plan&URL=1000-1099/1009/Sections/1009.981.html (accessed November 3, 2018). 25. News Release, Path2College, “Important News: Federal Tax Cuts and Jobs Act of 2017 Includes Changes to Section 529 College Savings Plans,” April 3, 2018, https://www.path2college529.com/buzz/?id=1049 (accessed November 3, 2018). 26. Haw. Rev. Stat. Ann. § 256:1–7, http://files.hawaii.gov/tax/legal/hrs/hrs_256.pdf (accessed November 3, 2018). 27. Idaho Code Ann. 33-5401(11), https://legislature.idaho.gov/statutesrules/idstat/Title33/T33CH54/SECT33-5401/ (accessed November 28, 2018). 28. 15 Ill. Comp. Stat. § 505, http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=210&ChapterID=4 (accessed November 3, 2018). 29. Ind. Code Ann. § 6-3-3-12(h), http://iga.in.gov/legislative/laws/2018/ic/titles/006#6-3-3 (accessed November 20, 2018). 30. 12D.1(2)(k), https://www.legis.iowa.gov/docs/publications/LGR/87/SF2417.pdf (accessed November 3, 2018). 31. K.S.A. § 75-646. 32. Ky. Rev. Stat. Ann. § 164A.305(13)(b), http://www.lrc.ky.gov/Statutes/statute.aspx?id=47977 (accessed November 28, 2018).

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to “take measures to modify… account withdrawal nn Michigan. Maybe. Michigan law says “qualified request forms to allow account owners…to permit higher education expenses” are those “defined in direct payments to K-12 schools.”33 section 529 of the Internal Revenue Code.”39 nn Louisiana. Yes. The state legislature passed a law nn Minnesota. No. Minnesota law states “qualified in May 2018 creating a new program that allows higher education expenses” are those “defined in families to save for public or private elementary section 529(e)(3) of the Internal Revenue Code,” and secondary school.34 While that program is and a “qualified distribution” means “a distribu- being set up, families that had already opened a tion made from an account for qualified higher plan with the state’s Student Tuition Assistance education expenses of the beneficiary.”40 and Revenue Trust before December 31, 2017, are authorized to make a one-time withdrawal of nn Mississippi. Yes. Mississippi defines qualified $10,000 or less to pay for elementary or second- higher education expenses as “any higher edu- ary schools. cation expense defined in Section 529 of the Internal Revenue Code.”41 The State Treasurer nn Maine. Maybe. Maine law states that “higher indicates that the federal change “appl[ies] to education expenses” are “certified expenses for MACS” (Mississippi Affordable College Savings attendance at an institution of higher education Program).42 as those expenses are defined by…the Internal Rev- enue Code.”35 nn Missouri. Yes. Although Missouri law states that “qualified higher education expenses” are nn Maryland. No. Maryland law states that “quali- the “qualified costs of tuition and fees and other fied higher education expenses” are limited to expenses for attendance at an eligible educational expenses defined in “529(e) of the Internal Rev- institution, as defined in Section 529(e)(3) of the enue Code.”36 Internal Revenue Code,” Missouri’s 529 Savings Plan indicates that “Missouri taxpayers can use nn Massachusetts. Yes. Although Massachusetts MOST 529 assets to pay for expenses for tuition law limits qualified higher education expenses to in connection with enrollment or attendance for those defined in “26 U.S.C. 529(e)(3),”37 U.Fund, K–12 with no state tax consequences.”43 Massachusetts’ 529 plan, indicates that “up to $10,000 per year can be applied toward K-12 tuition expenses.”38

33. David Lawhorn, Kentucky Education Savings Plan Trust Manager, letter to Randy Brady, TIAA Tuition Financing, Inc., July 10, 2018, http://thf- legal.s3.amazonaws.com/Amy%202018/2018%20K-12%20TIAA%20authorization%20letter.pdf (accessed November 28, 2018). 34. Louisiana Legislature, 2018 Session, HB 650, https://legiscan.com/LA/text/HB650/2018 (accessed November 3, 2018). 35. 20-A M.R.S. § 11471(7) (2018). 36. Md. Code Ann. Education §18-1901(n). 37. Mass. Gen. Laws Chapter 62, § 3(B)(a)(19) (2018), https://malegislature.gov/Laws/GeneralLaws/PartI/TitleIX/Chapter62/Section3 (accessed November 14, 2018). 38. Massachusetts Educational Financing Authority, U.Fund College investing Plan, https://www.mefa.org/products/u-fund-college-investing- plan/ (accessed November 28, 2018). 39. MCL 390.1472, http://www.legislature.mi.gov/(S(bd25lei0ex05akd4ha54nn4t))/mileg.aspx?page=getobject&objectname=mcl-390- 1472&query=on&highlight=section%20AND%20529 (accessed November 3, 2018). 40. Minn. Stat. Ann. § 136G.03, https://www.revisor.mn.gov/statutes/cite/136G.03 (accessed November 3, 2018). 41. Miss. Code Ann. § 37-155-105, https://codes.findlaw.com/ms/title-37-education/ms-code-sect-37-155-105.html (accessed November 28, 2018). 42. State Treasury of Mississippi, “Can MACS Be Used to Pay for Elementary and Secondary Tuition Expenses?” https://www.treasurerlynnfitch. ms.gov/collegesavingsmississippi/Pages/MACS-FAQs.aspx#01 (accessed November 28, 2018). 43. Missouri’s 529 College Savings Plan (MOST), “MOST Tax Benefits,” https://www.missourimost.org/home/why-choose-most/most-529-tax- benefits.html (accessed November 3, 2018).

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nn Montana. No. Montana law states that “qualified vide an exemption from New Mexico State income higher education expenses” are those “defined in tax” for 529 withdrawals for K–12 tuition.49 section 529(e)(3) of the Internal Revenue Code.”44 nn New York. No. New York law states that “quali- nn Nebraska. No. Nebraska law defines “qualified high- fied higher education expenses” are “any quali- er education expenses” as “certified costs of tuition fied higher education expense included in section and fees, books, supplies, and equipment required 529 of the Internal Revenue Code.” The New York for enrollment or attendance at an eligible educa- Department of Taxation and Finance notes that tional institution.”45 Nebraska State Treasurer Don “K–12 distributions would not be considered qual- Stenberg indicated that “withdrawals from NEST ified distributions under New York statutes and accounts to pay for K–12 tuition will be considered would require the recapture of any New York State non-qualified withdrawals under current state law.”46 tax benefits that accrued on contributions.”50 nn Nevada. Yes. Nevada does not have personal nn North Carolina. Yes. The North Carolina legisla- income tax. ture amended its law as part of its budget bill—over the veto of Governor Roy Cooper. The law states that nn New Hampshire. Yes. New Hampshire does not Parental Savings Trust Fund accounts may be used have personal income tax. for “the costs of education expenses of eligible students in accordance with section 529 of the Code.”51 nn New Jersey. No. New Jersey law states that “qualified higher education expenses” are those nn North Dakota. Yes. Although the state defines “described in paragraph (3) of subsection (e) of sec- “qualified higher education expenses” as those that tion 529 of the federal Internal Revenue Code.”47 are “defined in section 529 of the Code,” College SAVE, the state’s 529 Plan, indicates that “North nn New Mexico. No. New Mexico law references Dakota taxpayers can use College SAVE 529 assets “qualified higher education expenses, as defined to pay for expenses for tuition in connection with pursuant to Section 529 of the Internal Revenue enrollment or attendance for K–12 with no state Code.”48 The New Mexico Education Trust Board tax consequences.”52 asked the state’s taxation and revenue department to review the change in federal law and issue an nn Ohio. Yes. The state amended its law in March advisory letter on its impact on state law. The 2018 “to allow tax deductible contributions to department indicated that state law “does not pro- Ohio 529 plans for K–12 education expenses.” It

44. Mont. Code Ann. § 15-52-103. 45. Neb. Rev. Stat. § 85-1802, https://nebraskalegislature.gov/laws/statutes.php?statute=85-1802 (accessed November 3, 2018). 46. Nebraska State Treasurer’s Office, “College Savings Plan: State Legislation Needed for NEST Plans to Be Used for K–12,” https://treasurer. nebraska.gov/csp/ (accessed November 3, 2018). 47. N.J.S.A. 18A:71B-36, https://law.justia.com/codes/new-jersey/2016/title-18a/section-18a-71b-36/ (accessed November 3, 2018). 48. N.M. Stat. § 7-2-2. 49. Alicia Romero, Tax Information and Policy Office, State of New Mexico Taxation and Revenue Department, letter to John Monforte, April 23, 2018, https://static1.squarespace.com/static/5702d49b2fe1312243f9bddc/t/5b325ba50e2e722aa6288e4a/1530026955716/ NewMexicoTaxationRevenueDepartmentAdvisoryComment.pdf (accessed November 3, 2018). See also The Education Trust Board of New Mexico, “The Education Plan: Recent Federal Tax Law Changes,” https://www.theeducationplan.com/recent-federal-tax-law-changes (accessed November 3, 2018). 50. Office of the New York State Comptroller, “NY’s 529: Federal Tax Reform Update,” https://www.osc.state.ny.us/college/529.htm (accessed November 3, 2018). 51. N.G. Gen. Stat. § 116-209.25(b); North Carolina General Assembly, 2017-18 Session, S.B. 99, p. 232. 52. Bank of North Dakota’s 529 Plan, “Tax-Deferred Growth,” https://www.collegesave4u.com/home/features-and-benefits/tax-benefits.html (accessed November 3, 2018).

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provides that “higher education expenses” are Code.”57 PA 529, the state’s College Savings Pro- those “that meet the definition of ‘qualified high- gram, indicates that 529 funds may be used “to pay er education expenses’ under section 529 of the for expenses for tuition in connection with enroll- Internal Revenue Code.”53 ment or attendance at an elementary or secondary public, private, or religious school up to $10,000 nn Oklahoma. Yes. Oklahoma law states that “quali- per year, per beneficiary.”58 fied higher education expenses” include “tuition, fees, books, supplies, and equipment required nn Rhode Island. Maybe. Rhode Island law defines for the enrollment or attendance of a designated “qualified higher education expenses” as “tuition, beneficiary at an eligible educational institution.”54 fees, books, supplies and equipment required for The state’s College Savings Plan noted: “Effective enrollment or attendance at an institution of high- January 1, 2018, distributions for tuition in con- er education, and other education costs defined by nection with enrollment or attendance at an ele- federal law.”59 mentary or secondary public, private, or religious school are Oklahoma and federal income tax free nn South Carolina. Yes. South Carolina law states up to a maximum of $10,000 of distributions for that “qualified higher education expenses” are such tuition expenses per taxable year.”55 “any higher education expense defined in Section 529 of the Internal Revenue Code.” Future Scholar, nn Oregon. No. The state legislature passed a law in South Carolina’s College 529 Savings Plan, notes, June stating, “If a taxpayer makes a withdrawal “Effective January 1, 2018, families may withdraw from a savings network account for higher educa- up to an aggregate of $10,000 a year per beneficiary tion…to pay expenses in connection with enroll- tax free to cover K–12 tuition at public, private, or ment or attendance at an elementary or second- religious elementary or secondary schools…. There ary school, the amount of the withdrawal that is is not a distinction between K–12 withdrawals and attributable to contributions that were subtract- withdrawals to a college or university.”60 ed from federal taxable income under ORS [Ore- gon Revised Statute] 316.699 and the amount of nn South Dakota. Yes. South Dakota does not have the withdrawal that is attributable to previously personal income tax. South Dakota defines “quali- untaxed earnings and gains” will be added to fed- fied higher education expenses” as “tuition, fees, eral taxable income.56 books, supplies, and equipment required for enrollment or attendance…at an eligible education nn Pennsylvania. Yes. Pennsylvania defines “quali- institution, and any other expenses qualifying as a fied higher education expenses” as those expens- qualified higher education expenses under section es “defined by section 529 of the Internal Revenue 529 of the Internal Revenue Code.”61

53. 132nd Ohio General Assembly, S.B. 322, https://legiscan.com/OH/text/SB22/id/1774556/Ohio-2017-SB22-Enrolled.pdf (accessed November 3, 2018). 54. Okla. Stat. tit. § 70-3970.3, http://webserver1.lsb.state.ok.us/os/os_70-3970.3.rtf (accessed November 1, 2018). 55. Press Release, Oklahoma 529 College Savings Plan, “Important News: Federal Tax Cuts and Jobs Act Includes Changes to Section 529 College Savings Plans,” April 3, 2018, https://www.ok4saving.org/buzz/?id=1047 (accessed November 3, 2018). 56. Bill 4080, 79th Oregon Legislative Assembly, 2018 Regular Session, House. 57. Pennsylvania General Assembly, 1992, Act 11. 58. PA529, “FAQs,” https://www.pa529.com/faqs/ (accessed November 1, 2018). 59. 16 R.I. Gen. Laws § 61-57-3, http://webserver.rilin.state.ri.us/Statutes/TITLE16/16-57/16-57-3.HTM (accessed November 1, 2018). 60. South Carolina Future Scholar 529 College Savings Plan, “Common Questions,” https://futurescholar.com/resources/common- questions/#withdrawing-funds (accessed November 1, 2018). 61. SDCL 13-63-1, http://sdlegislature.gov/Statutes/Codified_Laws/DisplayStatute.aspx?Type=Statute&Statute=13-63-1 (accessed November 1, 2018).

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nn Tennessee. Yes. Tennessee does not have person- nn Washington. Yes. Washington does not have per- al income tax. sonal income tax. nn Texas. Yes. Texas does not have personal nn Washington, DC. Yes. Although DC’s law indi- income tax. cates that qualified higher education expenses “shall have the same meaning as in section 529(e) nn Utah. Yes. Although Utah law states that “higher (3) of the Internal Revenue Code,”68 the DC Col- education costs” are “qualified higher education lege Savings Plan says, “Account owners can treat expenses as defined in Section 529(e)(3),”62 the withdrawals for K-12 tuition expenses as ‘qualified state’s my529 indicates that “Utah residents … will higher education expenses’ with respect to both not face a recapture of previously claimed Utah the federal and DC tax benefit.”69 state income tax benefits if they withdraw up to … $10,000… to pay for K-12 tuition expenses at public, nn West Virginia. Maybe. West Virginia law defines private, and religious schools.”63 “qualified higher education expenses” as those “permitted under 26 U.S.C. § 529.”70 nn Vermont. No. Vermont law defines “postsecondary education costs” as “the qualified costs nn Wisconsin. Yes. Edvest, Wisconsin’s College Sav- of tuition and fees and other expenses for atten- ings Plan, notes that “distributions for tuition in dance at an institution of postsecondary educa- connection with enrollment or attendance at an tion, as defined by the Internal Revenue Code.”64 elementary or secondary public, private, or reli- The Vermont Higher Education Investment Plan gious school are federal and Wisconsin income notes that withdrawals for K–12 tuition expenses tax free up to a maximum of $10,000 of distribu- “may be subject to a 10% [sic] recapture penalty… tions for such tuition expenses per taxable year per and tax on the gain realized with respect to the Beneficiary.”71 withdrawals.”65 nn Wyoming. Wyoming does not currently have a nn Virginia. Yes. Virginia law states that college sav- 529 plan. ings trust account funds may be used for “qualified higher education expenses at eligible educational Conclusion institutions, as both such terms are defined in § Whether families and investors should use 529 529 of the Internal Revenue Code.”66 Virginia 529 savings plans to pay for K–12 expenses is a decision indicates that funds may be used for private or reli- for parents and students. Lawmakers and policy gious K–12 tuition.67 analysts cannot possibly know the best investment or spending decisions for every family, but federal

62. Utah Code Annotated § 53B-8a-102.5(7), https://le.utah.gov/xcode/Title53B/Chapter8A/53B-8a-S102.5.html?v=C53B-8a-S102.5_2017032520170325 (accessed November 29, 2018). 63. my529, “Check State Laws Before K-12 Tuition Withdrawals,” https://my529.org/newsletter-april-2018/check-state-laws-before-k-12-tuition- withdrawals/ (accessed November 28, 2018). 64. Vt. Stat. Ann. tit. 16 V.S.A. § 2876, https://legislature.vermont.gov/statutes/section/16/087/02876 (accessed November 1, 2018). 65. Vermont Higher Education Investment Plan, “How To’s,” https://www.vheip.org/how-tos/#make-a-withdrawal (accessed November 1, 2018). 66. Va. Code Ann. § 23.1-700, https://law.lis.virginia.gov/vacode/title23.1/chapter7/section23.1-700/ (accessed November 3, 2018). 67. Virginia 529, “Qualified Higher Education Expense,” https://www.virginia529.com/resources/key-terms/#qualified-higher-education- expense-qhee (accessed November 1, 2018). 68. D.C. Code Ann. § 47-4501(9) https://code.dccouncil.us/dc/council/code/sections/47-4501.html (accessed November 28, 2018). 69. DC College Savings Plan, “Important DC Tax Deduction Update,” https://www.dccollegesavings.com/home/k-12-tuition-update.html (accessed November 28, 2018). 70. W. Va. Code § 18-30-3. 71. News release, Edvest (Wisconsin’s College Savings Plan), “Important News: Federal Tax Cuts and Jobs Act of 2017 Includes Changes to Section 529 College Savings Plans,” May 8, 2018, https://www.edvest.com/buzz/?id=979 (accessed November 1, 2018).

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lawmakers gave parents more options with college savings for their children in the TCJA. State policymakers should not prevent parents from using their 529 savings plans for K–12 education expenses and should update state policy so as not to interfere with the flexibility now provided through the federal tax code for these accounts. Individuals and families should have the ability to make decisions about how to save and spend their hard-earned money. Investors must choose what is best for their current and future needs. With the TCJA, Washington gave families and students more options to utilize their own savings. Leveraging the flexibility now available through 529s may not be the right option for every account holder, but the new opportunities are welcome nonetheless. And it is impossible for observers or policymakers to identify the specific students for whom the option is a good fit. This is all the more reason for states to make sure this new opportunity is available to everyone—so that individuals and families can make the best choices for their children. —Jonathan Butcher is Senior Policy Analyst in the Center for Education Policy of the Institute for Family, Community, and Opportunity at The Heritage Foundation, and Elizabeth Slattery is Legal Fellow in the Edwin Meese III Center for Legal and Judicial Studies at The Heritage Foundation.